How Wealth Advisors Can Facilitate Impact Investments

Cynthia Muller

As high-net-worth individuals and families increasingly seek to make positive social and environmental impact with their investments, wealth managers are facing the challenge of incorporating impact investing into their practice. One out of every nine dollars under professional management in the United States is invested for positive social and/or environmental impact. That number will only increase over the next 30 to 40 years as an estimated $41 trillion in wealth transfers from the baby boomers to the millennials—a generation that prioritizes social impact in its investing. We are regularly approached by wealth advisors who want to meet this increasing demand and learn how better to help (and thus retain) their clients. The two questions we most frequently field from wealth advisors are 1) where to find deals and 2) how to assess them. In a nascent field, there is no roadmap for identifying the right investment. But by learning the fundamentals, wealth advisors can facilitate the process. Here are key steps to take:

1. Understand your client’s desired impact and identify the corresponding approach. The first step for wealth managers is to help clients distinguish between different forms of social impact and corresponding investment approaches. People in the field tend to approach impact investing from the lens of their own professional perspective. For example, some define socially responsible investing (SRI) as forms of impact investments. While a range of investments may achieve some form of positive social or environmental impact, SRI is a passive approach; those making the investments aim to support companies or initiatives that a) do not have negative social or environmental impacts or b) have responsible practices but not necessarily social impact goals.

Conversely, one of the main tenets of impact investments is intentionality: creating positive social and environmental impact alongside producing financial returns. Those making impact investments have a particular impact goal in mind and ideas of ways to track it. And from what we are experiencing, investors—particularly the next generation of wealth holders and institutional foundation leadership—are increasingly recognizing the distinction between the two approaches. Thus prior to beginning the process, it is important to ascertain whether your client merely wants to screen out negative impacts of his or her investments or whether he or she has a social impact goal in mind. True impact investments require active engagement with funds, companies, and organizations.

2. Gauge your client’s expectations. The next step is determining how much your client wants to be engaged. Impact investments require building a relationship with the investee. It’s important to know whether your client wants to interact with the investee and what kinds of reports they want back—impact updates, mid-term impact analyses, etc. Knowing the level of detail you will need to share also helps you plan for how much work the investment will take on your part.

3. Understand your client’s risk tolerance. As in the process of establishing a traditional investment strategy, it is important to establish parameters with your client upfront when developing an impact investing strategy. Understand their sector preference—i.e., which issues they want to target—and their financial risk tolerance. Based on this, you will be able to narrow the list of opportunities in which you’ll look for potential investments.

Field experts who know the space and players will know where to look for deals that meet your client’s basic parameters, and will have the relationships with fund managers that are necessary to structure deals. They can also help assess risk and reward, which is different for impact investments than for traditional investments: the ways in which you gauge the social impact of an opportunity is not standard, but customized for each investor. Moreover, experts can help you establish a monitoring system that ensures you can provide your client with regular updates on the investment’s performance.

Having partnered with wealth advisors on a range of activities—assessing specific deals, helping them integrate impact investments into current portfolios, guiding the process of getting started, and sometimes simply serving as an on-call partner to help with questions or issues that arise—we believe there is enormous potential for professionals to work together to meet growing client needs and build the field.

Cynthia Muller leads the firm’s impact investing practice. She helps individual and institutional clients understand the field of impact investing, develop strategies, and structure investments to accomplish their social and environmental goals. She tweets from @cynmull.

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